Depending on where you are in the world, your investment profile and your financial circumstances you may choose to invest in the stock market in your own currency or a foreign currency. No matter which you choose, you need to be aware of the advantages and disadvantages of both strategies!
Investments in your own currency
One advantage of investing in your own currency is that it is easier to understand how your placement is performing. And unlike foreign currency investments, an investment in domestic currency avoids the issue of exchange risk.
Also, placements made in your own currency using domestic accounts are usually easier to declare and manage than investments made in a different monetary area through a foreign service provider whose reporting will not be straightforward in terms of using it for your tax declaration.
Yet limiting yourself to investments in your domestic currency reduces your access to placement opportunities that are available internationally. And if that is not problematic when your country is enjoying sustained growth, it can quickly become so once real growth (corrected by inflation) starts to stagnate.
Taking an international approach is both relevant and legitimate in terms of accessing new investment opportunities and delivering dynamism for your portfolio, as well as other potential benefits to this approach.
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Foreign currency investments
There are three compelling reasons for foreign currency investments, namely performance, stability, and diversification.
Growth cycles can vary wildly from one economic cycle to another, both between emerging and developed countries and even within these two main groups.
Investing abroad in a particularly dynamic and promising monetary zone is an excellent way of seeking equity portfolio performance.
However, this surplus of potential performance needs to be looked at carefully in light of the risk levels involved in the placement opportunities in question. Investing in an emerging country will generally expose you to greater economic risk in the event of a crisis, to country-specific political risk and to inflationary risk.
We know this from the monetary crises experienced by Argentina and Venezuela, during which foreign investors saw their placements destroyed by hyperinflation and adversity in the currency market.
While some investors will be seeking performance, others will be looking for more stability above all else for their placements. Investors consider currencies like the Swiss franc to be particularly reliable.
Should an economic crisis occur or the financial markets experience a rise in tensions they will take the role of a safe-haven currency, offering investors shelter from volatility and risk.
The main currencies like the Euro, the US dollar, the Yen and the Swiss franc are of particular interest to residents of emerging countries who are looking for a stable placement that can protect them from inflation.
To avoid capital flight, countries will often impose limits. In India, the central bank sets an annual limit on residents of $250,000 on foreign investments.
Plus de résilience grâce à la diversification
Qu’il s’agisse de rechercher davantage de performance ou de stabilité, un investissement en devises étrangères reste un excellent levier pour ajuster le ratio rendement/risque de son portefeuille boursier. Et dans ce cadre, plutôt que d’opter pour telle ou telle devise, l’essentiel consiste à diversifier correctement ses allocations.
Depuis la publication de la Théorie moderne du portefeuille en 1952 par Harry Markowitz (récompensé quelques années plus tard du Prix Nobel d’économie), la diversification occupe une place centrale dans le monde de la gestion d’actifs.
Pour un investisseur disposant d’une surface financière suffisamment conséquente, répartir ses placements sur plusieurs devises, plusieurs zones géographiques, plusieurs actifs, plusieurs secteurs et plusieurs entreprises est donc l’une des meilleures façons d’optimiser son couple rendement/risque.
Quelques considérations techniques et financières doivent toutefois être prises en considération avant d’investir à l’étranger !
Lorsque votre investissement en devises étrangères est réalisé via une plateforme d’investissement domestique, les commissions de courtage et les frais de change prélevés par votre intermédiaire financier peuvent parfois être considérables…
Une solution consiste donc à ouvrir un compte directement dans la zone monétaire ciblée auprès d’une plateforme d’investissement locale afin de bénéficier de conditions d’investissement plus avantageuses, et de recourir à un spécialiste du change pour convertir et transférer votre capital à l’étranger.
More resilience from diversification
Whether you are interested in better performance or stability, foreign currency investment is a lever for adjusting the yield/risk ratio of your stock portfolio. Rather than choosing one currency over another, it is essential to diversify your allocations correctly.
Since 1952’s Modern Portfolio Theory by Harry Markowitz (for which he later won the Nobel Prize in Economics), diversification has had a central role in the world of share management.
For investors with enough financial strength, sharing placements across different currencies, geographies, shares, sectors and companies is one of the best ways of optimizing the relationship between return and risk.
There are a few technical and financial considerations to consider before investing abroad.
When a foreign currency investment is made using a domestic investment platform, the broker exchange fees your financial intermediary takes can be considerable.
A solution lies in opening an account in the monetary zone using a local investment platform to benefit from the most advantageous investment conditions and in using an exchange specialist to convert and transfer your foreign capital.
Should you buy shares in Euros or Swiss francs?
Making speculative predictions about the currency market is very dangerous (even for the experts). Rather than the rise or fall of currencies, it is better to base your decision on other, more objective criteria.
If you are considering shares in a particular company, it is a good idea to begin by finding out where the stock is listed so you can compare the liquidities of the two markets (i.e. trade volumes of the shares in question). All things being equal, it will usually be best to choose the most liquid market.
Comparing the interest rates of two monetary zones is also good practice as the difference between them will impact how the exchange rate develops over time. Some much-lauded trading strategies like Carry Trade are based on this principle!
Take historic returns on various stock exchanges with a pinch of salt. On the one hand, past performance is not an indication of future performance. And on the other, the way these are calculated changes from one stock index to another.
In France, the CAC 40 lists the basket of shares progress without reinvested dividends, while in the United States, the Dow Jones includes these. These differences could lead to errors if your analysis is not sufficiently indepth.
Finally, check the geography of your investment. Where a company is listed doesn’t always correspond directly with where its business is done. For example, the French stock market index makes 70% of its income abroad!
There are advantages and disadvantages attached to all currencies so it makes sense for you to consider diversification as a means to optimize the return/risk ratio of your portfolio but also, and above all, to rationalize your exchange fees.